(Reuters) - U.S. respiratory drug company Innoviva Inc has reached a settlement with activist hedge fund Sarissa Capital Management LP to replace its board of directors and remove the threat of a new proxy contest, people familiar with the matter said on Monday.

The settlement comes just two months after a Delaware judge handed Sarissa a legal victory by installing two of the fund’s nominees to Innoviva’s board of directors. Sarissa had sued Innoviva, accusing it of backing out last April of a settlement that Sarissa agreed to end its previous proxy contest.

As part of the new settlement with Sarissa, Innoviva will accept three new independent directors to its board and dismiss five of its current directors at its next annual general meeting later this year, the three sources said. The resulting board will have five members, two of which will be Sarissa representatives, the sources added.

The new board members will include Sarissa’s general counsel Mark DiPaolo, media consultant Jules Haimovitz and immunologist Sarah Schlesinger, the sources said.

Innoviva will retain the board members added by Sarissa last year, namely investment banker George Bickerstaff and Sarissa Capital senior analyst Odysseas Kostas, they added.

The sources asked not to be identified ahead of any official announcement. Sarissa declined to comment, while Innoviva, which has a market capitalization of about $1.6 billion, did not immediately respond to a request for comment.

Sarissa, which owns an approximately 3 percent stake in Innoviva, has accused the company of spending too much money on executive pay and board compensation, given that its only function is to manage the asthma and chronic obstructive pulmonary disease drug royalties it receives from GlaxoSmithKline Plc. GlaxoSmithKline is Innoviva’s largest shareholder, with a 29.6 percent stake in the company.

Sarissa now plans to push for changes on how Innoviva spends money and consider moves such as share buybacks and dividend hikes, according to the sources.

Sarissa has a track record of shaking up boards in the pharmaceutical industry. Its past targets have included Biogen Inc and Ariad Pharmaceuticals Inc, a manufacturer of cancer drugs which sold itself to Japanese drugmaker Takeda Pharmaceutical Co Ltd last year for $5.2 billion.

In its first brush with Sarissa, Innoviva told the fund last April it agreed to settle a challenge to its board just hours before a shareholder vote, only to back out after it found out that BlackRock Inc, one of its top investors that was supportive of Sarissa, switched sides and sided with the company, according to court documents.

Delaware judge Joseph Slights ruled in December that Innoviva’s “opportunistic maneuvers” to get out of the agreement with Sarissa offended “basic notions of equity.”

Reporting by Greg Roumeliotis and Carl O'Donnell in New York; Editing by Lisa Shumaker